Unregulated financing by brokers: SECP bench reduces penalty to Rs 0.5 million

An appellate bench of the Securities and Exchange Commission of Pakistan (SECP) has reduced penalty from Rs1,000,000 to Rs500,000 on securities brokers for violating regulatory framework regarding financing and extending credit.

The SECP bench has also directed brokers to comply with the requirements of the said framework, in letter and spirit, to avoid strict penal action in future.

Earlier, SECP commissioner issued a strict warning to the appellant (securities broker) for its failure to collect Finance Participation Ratio (FPR), margins, recover mark-to-market (MtM) losses, making payments on debit balance and non-disclosure of requisite information in quarterly accounts.

The SECP commissioner had also imposed a monetary penalty of Rs1,000,000 for the violation of the framework regarding unregulated financing/credit extended by the broker to its clients and charging markup thereon.

The SECP commissioner informed the appellate bench that the broker was extending credit by providing finance to its clients for trading of securities.

The broker was also charging mark-up from its clients in the guise of late payment charges.

As per Net Capital Balance Calculation Guidelines charging mark-up, late payment charges or any charges with any other name on the balance of trade receivable is strictly prohibited, if the same are charged for arranging/extending credits for/to the clients other than allowed under Section 16 of the Securities and Exchange Ordinance, 1969. The broker was not allowed to charge mark-up or late payment on the receivables from its clients.

A securities broker is restricted to carry out regulated activities for which it has not obtained license and can only extend regulated modes of financing, therefore, extending finance beyond the prescribed scope is violation of the regulatory obligations.

The non-collection of FPR and MtM losses in MTS transactions, non-collection of margins in the ready market and MtM losses in the futures market from its clients are examples of unregulated modes of financing, the SECP commissioner maintained.

In view of the record, the SECP bench has no doubt that violations of the framework regarding failure to collect FPR, margins, recover MtM losses, making payments on debit balance and nondisclosure of requisite information in quarterly accounts were established against the broker.

The bench observed that the SECP commissioner has adequately mentioned the instances of violations.

The bench was of the view that instead of issuance of warning against six violations, the SECP commissioner should have imposed monetary penalty on the appellant.

As per law, the SECP commissioner was empowered to suspend/cancel the appellant's license and impose monetary penalty, however, by issuing a warning, a lenient view was taken.

In the circumstances, we have no doubt that violations against the appellant are established, however, the appellant has taken steps to reduce the continued debit balance and has significantly reduced the quantum of mark-up.

Furthermore, the bench has also considered the Appellate Board resolution whereby it had been resolved to stop charging mark-up from July 31, 2017, the SECP appellate bench said.

Therefore, keeping in view the broker's efforts to become compliant with the requirements of the framework, while maintaining the verdict of the impugned order, we hereby reduce the penalty of fine from Rs1,000,000 to Rs500,000 and direct the appellant to comply with the requirements of the framework, in letter and spirit, to avoid strict penal action in future, the SECP appellate bench added.